Horne Engineering Corp. has 30,000 6.0% bonds convertible into 30 shares per $1000 bond. Horne Engineering has 500,000 outstanding shares and a tax rate of 35%. Compute (basic) earnings per share if after-tax earnings are $750,000 and diluted EPS when bonds are converted.

Question

Quizplus · Accepted Answer

- Basic EPS = (after-tax earnings - preferred dividends) / weighted average number of common shares outstanding
- Preferred dividends are not mentioned, so assume there are none.
- Weighted average number of common shares outstanding = 500,000
- Basic EPS = ($750,000 / 500,000) = $1.50
- Diluted EPS = (after-tax earnings + conversion of bonds - preferred dividends) / (weighted average number of common shares outstanding + potential additional shares from conversion of bonds)
- Conversion of bonds: 30,000 bonds * 30 shares/bond = 900,000 potential additional shares
- Diluted EPS = ($750,000 + ($1,000,000 * 0.06 * 0.65)) / (500,000 + 900,000) = $1.37
- Therefore, the correct answer is B.